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Opinion Contributor

Why tax hikes fall short for cliff talks

The author says the president can’t pay for his proposed spending without tax increases | AP Photo

By ED CONARD | 12/12/12 9:27 PM EST

To accelerate private-sector growth, Republicans will need all their negotiating leverage to minimize taxes on investors by maximizing spending cuts. In a world where the majority of voters garner benefits from spending and see little cost to taxing investors, that’s never been easy. But the current circumstances make it much more precarious.

Lawmakers have increased government spending 30 percent since 2007 — from 20 percent of gross domestic product historically to 24 percent — on flat tax revenues. That has opened up an unprecedented $1.1 trillion-a-year deficit. The resulting unsustainable rise in debt coupled with near-zero interest rates have shielded spending advocates from voters realizing that draconian across-the-board tax increases are needed to support the proposed level of spending. Instead, many voters mistakenly believe that raising taxes on upper-income taxpayers provides enough revenue to bring taxes and spending into balance. As a result of these misunderstandings, most voters blame Republicans, not Democrats, for refusing to compromise on the deficit by agreeing to raise taxes on investors. These misunderstandings have given the president an opportunity for two bites at tax-the-investors apple — one by the end of the year to avoid the fiscal cliff and another when a comprehensive solution to the deficit is finally negotiated. Republicans must be shrewd to avoid this piecemeal negotiating trap.

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Debt can’t continue to rise relative to GDP forever. To hold it constant, we can sustain deficits of about $200 billion a year. Today, that leaves a $900 billion-a-year gap between revenues and spending. Letting the Bush tax cuts expire on upper-income taxpayers raises less than $50 billion a year. Limiting deductions to 28 percent of income for upper-income taxpayers, raising capital gains and dividend tax rates to ordinary income tax rates and raising estates taxes together would raise less than $100 billion a year more. Reasonable changes to Medicare and Social Security, such as raising the retirement age and raising upper-income Medicare premiums, would raise much less than $50 billion a year more. It’s true that ending the Afghanistan war saves about $150 billion a year. But Obamacare increases spending by a similar amount — even after its tax increases and Medicare cuts. And government spending as a percentage of GDP is projected to continue rising as the number of workers per retiree drops from 3-to-1, currently, to 2-to-1.